Curveballs

We’re clearly going to have to be out on the hunt for a new TMMism
regarding a Bernankage – good thing that “Yellenage” also works and even sounds
nice, coincidentally rhyming with mileage as in “what’s the mileage from
Yellenage”? Well just as you thought that TMMisms were already getting heavy,
we got another wake-up call from Plosser the Tosser this morning – more on this shortly. Everyone
been portraying JY as the über-dove for ages and here she goes bazooking away
the FF’s curve:

Now one thing that piqued TMM is Yellen’s assertion that interest
rates aren’t seen as potentially rising before a “considerable time” after the
end of asset purchases. Now we’re going to throw a curveball here and say that
there’s no way Yellen necessarily meant six months in saying that. Asset
purchases should have ended by the end of October according to Fisher yet the
economy should have picked up some steam which means that even accounting for
the fact that the six month rule might be correct, TMM sees considerable upside
potential to the FF's short-end. Let us not forget that the current level
of Fed funds is 0% TO (note the notion of a BAND here) 0.25% while overnight implied is now 0.08%. In other
words, you could already see that drift higher well ahead of the 0.25% level
implied for March 2015 by FF. In fact, March 2015 could well be when the FOMC
first hikes by 25bps. Returning to Plosser the Tosser, his comment earlier on
that we’re likely to see FDTR at 4% in 2016 would basically set us up for 50bps clips
of rate rises starting next March – rather than the 25bps increments currently
priced in. In TMM’s view, this has the potential to see a number of things move
higher in rates: 1y5y swaptions (below) – and any rates-related vol
generally (see one of TMM’s measures (z-score based) below also):

An interesting other curveball that TMM is keeping a close watch
on is Turkey. Obviously we’ve all been seeing how Erdogan is helping curtail
the EPS (?!) generated by Twitter. That said, there’s a further Troika-related
issue round the corner. TRY continues to grind lower vs. USD while local real
rates should keep rising – again, not the ideal predicament for a country like
Turkey which suffers from one of the ailments that TMM (in a preceding life)
had highlighted last June. Chart courtesy of the US ex-investment bank:

Now the curveball nature of this particular elephant is fairly
simple. As some TMMers may have read, the biggest creditors of the Turkish
corporate sector are…the Greek banks (see below, courtesy of CS):

So while the EU may have happily been brushing aside the issue of
seriously engaging talks with Turkey on some sort of trade agreement, the EU/Troika
could thus happily find themselves in the position of having to bail out Greece
yet again. But this time, the bailout would effectively be one of the Turkish
corporates. And herein lies the third curveball: Grexit come dark hole come
final resoluto-conflagration of the EU governance disaster. TMM is acutely
aware of the fact that this sounds like a distinctly catastrophic scenario but
the non-“dive into your bunker” outcome of this all really boils down to 1)
flatteners/long vol in the US belly, 2) higher USD still vs. EM and more
broadly speaking G10 and 3) watch Turkey – bigger turkey than you think.